After a more-than-sluggish 2023 when it comes to commercial real deals, Marcus & Millichap sees a revival in 2024, according to John Chang, its National Director of Research and Advisory Services.
Leading the revival is that the industry is resilient, interest rates have started to come down and will continue to do so, and approximately $240 billion of capital targeting commercial real estate is a waiting entry to the market.
Depending on how you measure it sales were down by 20% to 25% compared to the average number of transactions between 2014 and 2019, said Chang, speaking on a company news video.
“Commercial real estate sales activity was pretty consistent over that span, but I anticipate we’ll see a recovery in 2024, maybe not to the levels we saw in 2021 or 2022, which were abnormally active, but certainly moving back into alignment with where we were before the pandemic,” he said.
The consensus baseline economic forecast now calls for a soft landing with comparatively low recession risk in most predictions, according to the video.
“We’re on the backside of the inflation curve with virtually all key inflation measurements showing significant declines since they peaked in mid-2022,” Chang said. “Additionally, job creation remains positive, but it has slowed steadily over the course of the last year. That trend aligns well with the soft-landing scenario.”
Marcus & Millichap’s current forecast for job creation in 2024 is 1.7 million jobs. It expects the unemployment rate to remain range-bound near 4%.
“On top of that, a variety of other indicators remain modestly positive, including inflation-adjusted core retail sales, service industry metrics, consumer sentiment, and corporate profits,” Chang said.
“So basically, the economy should give commercial real estate a modest tailwind in 2024, but more importantly, the generally positive outlook will help alleviate uncertainty and moderate caution levels among investors. That psychological dimension is key to a market recovery.”
Secondly, interest rates are falling, and Chang said the broad-based expectation is that they’ll continue to move lower over the course of the year.
The 10-year treasury peaked at about 5% in October last year and has since come back down to the 4% range, and at the Federal Reserve’s meeting in December, Chairman Powell suggested rate reductions could begin this year even before inflation reaches the Fed’s 2% inflation target, he said.
At present, Wall Street has placed a 60% likelihood that the Fed will reduce rates by 25 basis points to 5% in March, according to the video, and by June, there’s a 50% likelihood the overnight rate will be reduced to 4.5%.
Furthermore, by September, Wall Street is placing 80% odds of rates being 4.25% or lower, and by December, Wall Street believes the Fed funds rate has an 85% likelihood of being 4% or lower.
“Those probabilities change by the day, sometimes by the hour or even by the minute, but they do give a good general perspective on where Wall Street investors are putting their money based on the current outlook,” Chang said.
“As the cost of debt capital comes down, it will help close the buyer-seller expectation gap supporting investment activity. And unlike in 2022 and 2023, when rising rates were derailing deals, falling rates could bolster deal flow.”
The sheer volume of flow will be intense based on the capital that’s waiting to be placed, according to the video.
The approximate $240 billion of “dry powder” is close to the record level set in 2021, Chang said.
“Of course, it’ll take time for the capital to be placed, and sales activity will likely ramp up over the course of the year, but by the second half of 2024, activity levels may be back in alignment with the pre-pandemic norm,” he said.
Granted, there are always risks, he said.
“The Fed could hold rates too high for too long,” according to Chang. “There could be a government shutdown at the end of January. Additional geopolitical conflicts could erupt, or existing ones could spread.
“For now, though, it looks like we’ve cleared most of the hurdles that disrupted the market last year and the investment climate is improving.”